Bangladesh’s

g Monetary
y Policy
y 2010

Dr. Atiur Rahman

Governor, Bangladesh Bank
Email: governor@bb.org.bd

Luncheon Meeting of
Embassy of the Federal Republic of Germany

13 April, 2010
Dhaka

Outline
{ Introduction
{ Evolution of Monetary Policy Formulation in Bangladesh
{ Objectives of Monetary Policy in Bangladesh
{ Monetary Policy Framework in Bangladesh
{ Formulation of Monetary Policy
{ Near Term Growth and Inflation Outlook
{ Monetary Policy Stance for H2 FY 10

{ Targeted Versus Actual Growth Paths of Monetary Aggregates

in FY10
{ Sovereign Rating: Stable Outlook for Bangladesh
{ Concluding Remarks…
2

1
 Introduction
{ Monetary policy, both in developed and developing
economies,, seeks to maintain price
p stabilityy
accompanied by sustained output growth in the face of
internal and external shocks faced from time to time.

{ For developing economies like Bangladesh with

significant underemployment/under exploitation of
production factors, supporting higher output growth is an
overriding priority.

{ Monetary policy of Bangladesh Bank (BB) therefore aims

at maintaining price stability while permitting monetary
expansion needed to support output growth at sustained
high rate.
3

Evolution of Monetary Policy

Formulation in Bangladesh
{ In the 1970s and 1980s, monetary policy in Bangladesh
was conducted with full direct control over the
interest rates and exchange rates and also on the
volumes and directions of credit flows.

{ The situation began to change in the 1990s with the

abolition of directed lending and gradual liberalization
of interest rates. The regime of flexible exchange rate
started from 2003.
2003

{ From then on, interest rate and exchange rates are

largely market driven with occasional central bank
interventions to maintain stability and to address
consumer protection concerns.
4

2
 Objectives of Monetary Policy in
Bangladesh
{ Maintaining domestic price stability, external sector
viability;

{ Supporting inclusive, broad-based economic growth.

Formulation of Monetary Policy:

Current Practices in BB
{ Since 2006, BB has been announcing half-yearly
Monetaryy Policyy Statements ((MPS)) to anchor inflation
expectations of economic agents and the general
public.

{ For the first time, drafting of the Monetary Policy

Statement for H2 FY10 was preceded by extensive
stakeholder consultations from the grassroots level up
t the
to th level
l l off experienced
i d professionals
f i l including
i l di g
past Finance Ministers /Advisers / Governors, think
tanks and trade bodies.

3
 Monetary Policy Framework in
Bangladesh
Policy Instruments: Targets:
g Goals:
9CRR and SLR (i) Operating Targets
¾ Price Stability
9 Open Market Operations ¾ Reserve Money
withdrawing or injecting ¾ Economic Growth
liquidity
¾ Financial Stability
9 Changes in policy interest (ii) Intermediate Targets
rates (bank rate, repo, ¾ Broad Money
reverse repo rates)*

Policy Decision: Information Variables:

Based on market ¾ Foreign Reserves

information and value
judgment of the policy
makers
¾ Short-term Interest Rates
¾ Liquidity Situation
¾ Domestic Credit
¾ Information and Exchange Rates

* In addition to policy interest rate changes from monetary policy perspective, interventions on
specific lending rates occur sporadically to rectify aberrant trends like excessive intermediation
spread.
7

Policy Approaches and Tools

{ BB mainly uses monetary targeting to influence
CPI, drawing up monetary programs each financial year
with target growth path for broad money (M2) that
accommodates monetary expansion commensurate with
the projected real GDP growth, inflation, and the likely
change in income velocity of money.
{ Reserve Money (RM) growth path is the operating target
used by BB to influence the M2 growth path (the
intermediate target),
target) for this in turn to influence
CPI, the final target.
{ Changes in key policy interest rates (repo, reverse repo
rates), Cash Reserve Requirement (CRR) and Statutory
Liquidity Ratio (SLR) are also employed as necessary, in
support of the monetary programs. 8

4
 Near Term Growth Outcome & Outlook
{ Domestic demand remains robust, well supported by
growing workers’ remittance inflows and budgetary
stimulus outlays including higher social safety net
spending.

{ After a slower first quarter, manufacturing output and

investment activities accelerated from Q2 FY 10.

{ During July-March 2009-10, opening of import LCs

grew by around 22%.

{ Following 10.3% y-o-y growth in FY 09, exports

weakened in FY 10 (4.7% y-o-y decline during July-
January 2010) due to weak growth recovery in markets
abroad.
9

Near Term Growth Outcome..(Cont’d)

{ The agriculture sector output activities are responding
robustly to market price incentives and support
measures provided by the GoB and BB.

{ During July-February FY 10, the growth of agricultural

credit disbursement was recorded at 21% against 7.2%
during the same period of FY 09 .

{ Output activities in the service sector are

correspondingly vibrant; Capital market activities
remain buoyant.

{ BB’s monetary program for FY 10 is designed to

accommodate 6% real GDP growth.
10

5
 Growth Outlook

11

Near Term Inflation Outcome & Outlook

Rate of Inflation CPI inflation
(12 month average)

10.00 12.00
9.00
10.00
8.00

7.00
8.00
%

6.00
%

5.00 6.00
4.00
4.00
3.00

2.00
2 00
2.00
Feb-09
Mar-09

May-09
Jun-09
Jul-09

Nov-09
Jan-09

Sep-09
Oct-09

Dec-09
Jan-10
Apr-09

Aug-09

Jan-09

Mar-09

May-09

Oct-09

Jan-10
Nov-09
Feb-09

Jun-09
Jul-09
Aug-09
Sep-09

Dec-09
Apr-09

12 Month Average Point to Point General Food Non-food

12

6
 Near Term Inflation Outlook..(Cont’d)
{ Point-to-point and 12-month average CPI inflation in
Bangladesh were both on declining trend in FY 09 from
Q2 onward, driven by decline in global commodity and
fuel prices and bumper domestic output of the boro
rice crop.

{ In FY 10 CPI inflation has been edging upward

slowly, driven mainly by rising import prices of
commodities.

{ The 12-month average CPI inflation is projected to be

at or under 6.5% at end June 2010.

13

Fiscal Developments
{ Revenue receipts in H1 FY 10 registered 16.8% growth
over the same period of previous year with high
growth in income tax offsetting the low growth in
custom duty receipts.

{ The 28.2% utilization of ADP of the annual allocation

of Taka 305.0 billion during H1 FY10 was better than
the 23.0% utilization during the same period of FY 09.

{ High net sales of NSD instruments and substantial

budget support from ADB drove down bank borrowing
for deficit financing into negative; leaving greater
room for expansion of credit to the private sector.
14

7
 Developments in External Sector
{ Export shipments declined in FY 10 due to weak
demand recovery in markets abroad with 4.7% y-o-y
decline during July-January 2010.
{ There are indications of incipient recovery in export
growth; Order books of exporters in the apparel sector
are reportedly full with shipments to new destinations
in East Asia beginning to offset demand weakness in
traditional markets.

{ Opening of LCs for imports of inputs by the apparel

sector are on increasing trend. Opening of LCs for
inputs of capital goods have lately on rising trend,
indicating restoration in new investment momentum.
15

Developments in Money and Credit

{ Slow off-take of bank credit from deposits and soaring
workers’ remittance inflows led banks to leave large
excess balances in their Taka and foreign currency
accounts with the BB in H1 FY 10, causing high growth
in reserve money.
{ The liquidity surge in H1 FY 10 has declined in H2 FY
10, with pick up in imports and with BB’s active use of
reverse repo
p tool.

16

8
 Monetary Policy Stance: Jan-Jun 2010
{ The latest issue of BB’s half yearly Monetary Policy
Statement ((MPS)) outlines the monetaryy p
policyy stance
to be followed in H2 FY10.

{ The MPS for H2 FY10 stresses on support for sustained

high broad-based economic growth in the unfolding
internal and external context, while containing
inflation within tolerable moderate levels.

{ BB will continue a supportive monetary stance until

fuller restoration of investment confidence in the
domestic economy and with firmer demand recovery
in the export markets recovering from the global
recession. 17

Broadening Financial Inclusion

{ Monetary policies of BB seek to support enhancement
not onlyy in qquantum but also in qqualityy of g
growth
measured in terms of inclusiveness and environmental
sustainability.

{ Therefore, BB has recently embarked on campaign-like

thrust on broadening financial inclusion, and has
launched several refinance support lines for increased
l di g to
lending t sectors
t lik
like:

z agriculture, SMEs, effluent/waste disposal, solar/

biogas/other renewable energy projects.

18

9
 Broadening Financial Inclusion..(Cont’d)
{ The Agricultural Credit Program announced by BB for
FY 10 enjoins
j all banks to engage
g g in lending
g for a
comprehensive range of on- and off-farm rural
economic activities.

{ A first ever Taka 5.00 billion refinancing line against

loans to landless sharecroppers.

{ Bank accounts for farmers at only Taka 10.

{ Motivating banks and financial institutions to expand

lending to under-served sectors both as business case
and as CSR obligation.
19

In FY 10, Actual Growth Paths of Monetary Aggregates

Remain Close to Their Programmed Paths
Broad Money (M2)
3600
3,280 3 279
3,279 3423
3400 3274
Prog. Actual 3,229
3,119 3,125
3200
3,035
2,964 2,980
3000 3174
2,782 3064
2722
2800 2915
In Billion Taka

2,668
2600 2,487 2,719 2754
2566
2400
2453
2200 2,114

2000
1,806 2072
1800
1 514
1,514
1600 1730
1,297
1400
1481
1200 1276
1000

20

10
 Domestic Credit
3400
3258
3200 3092
3001 3018
2927
3000 2892 2899
Prog. Actual
2895 2950 2982
2800 2701
2668 2818 2833 2836
2576 2735
2600
2639
In Billion Taka

2433
2400 2492
2350
2200
1997
2000
1973
1800 1746

1600 1675
1444
1400
1231 1402
1200
1152
1000

21

Credit to Private Sector

2550 2437 2464 24532543
2373
2314
2350 2234 2268
Prog. Actual 2229 2393

2150 2088 2116 2249

2179 2196
1996
2102
1901 2045
1950
1951
In Billion Taka

1750
1749
1522
1550

1323 1492
1350

0
1120 1261
1150
959 1086
950
889
750

22

11
 Reserve Money and Net Domestic Assets
700
679.1 651.8 649.7 649.7
629.1 642.7
611.3 619 3
619.3 628 0
628.0 673.9 651 1 671.0
651.1
627 4
627.4 671 0
645.0 645.0
600
Reserve Money

500

400
Billion Taka

300

277.8 237.0
Net Domestic Assets
200 228 0
228.0
201.8 216.2 152.4 154.5 156.0 142.6 188.8
189.5 168.1 147.8
157.3 145.0
100

Feb.- 10
Jun.-09

July- 09

Aug.- 09

Sep- 09

Oct.- 09

Nov.- 09

Dec.- 09

Jan.-10

March- 10

07 April- 10

Jun.-10
RM Actual RM Prog. NDA Actual NDA Prog.

23

Sovereign Rating: Stable Outlook for

Bangladesh
{ Sovereign rating for the first time Country S&P Moody’s
by two international rating I di
India BBB
BBB- B 3
Baa3
agencies- Standard and Poor’s Bangladesh BB- Ba3
(S&Ps) and Moody’s regarded Pakistan B- B3
Bangladesh as a reliable
Sri Lanka B NR
destination for international
Indonesia BB Ba2
creditors and investors.
Thailand BBB+ Baa1

{ In the global financial arena, the Vietnam BB Ba3

BB- and Ba3 sovereign credit Malaysia A- A3

ratings by S&P and Moody’s Cambodia B+ B2

respectively, ranked Bangladesh
only behind India in South Asia.

24

12
 Sovereign Rating: Major Observations
{ Resilience of Bangladesh economy to domestic and
external shocks with stable economic growth over the past
decade.

{ Macroeconomic and price stability underpinned by prudent

economic management.

{ Strong and resilient RMG sector and robust inflow of

workers’ remittances maintaining external sector viability.

{ Domestic demand underpinned by strong remittances, MFI

activities and social safety net payments.

{ Narrow revenue and export base seen as ratings

constraints.
25

Concluding Remarks
{ Supportive monetary condition will be maintained in FY
10 to help the recovery of exports and new investment
activities get firmer traction.
{ Successful spurring of growth will keep inflationary
pressures in check by maintaining benign situation on
the supply side.

{ Efficient and expeditious ADP implementation will

create conditions
di i crowding
di i
in private
i sector
investments, facilitated by congenial monetary regime.
{ BB has taken recent steps to deepen and broaden
secondary trading in treasury securities to eliminate
settlement risks.
26

13
 Concluding Remarks..(Cont’d)
{ BB has introduced mandatory Basel II based capital
requirements for banks from 2010 to enhance banks’
capacity of handling intermediating large financial
flows.

{ Steps have also been taken to develop and strengthen

risk assessment capacities including forward looking
stress testing in the banks as well as in BB supervision
departments
departments.

{ In conclusion, BB stands ready to respond promptly

with appropriate modification in monetary stance
required by any exigency in unfolding developments
in the domestic and external scene.
27

Many thanks

28

14